Skip to main content
SpringerLink
Log in

When risky decisions generate externalities

  • Published:
Journal of Risk and Uncertainty Aims and scope Submit manuscript

Abstract

Many risky decisions generate either positive externalities (e.g., opening a small business, engaging in research and development, vaccinating) or negative externalities (e.g., smoking, reckless driving, unprotected sex). I develop a new experimental framework for evaluating risk tolerance when risky decisions that generate externalities by modifying the allocation task of Gneezy and Potters (1997). In the ‘risk with externalities’ framework, for each unit increase in a risky allocation, an external cost or benefit is imposed upon a group member. I further vary the magnitude of the external effect to investigate the sensitivity of risk taking to the marginal external effect. Results indicate that risky decisions are driven by a combination of social and non-social factors. When individuals both impose and receive externalities, the preferred level of risk taking is lower if the externality is negative, regardless of the magnitude of the marginal external effect. Risk taking is then further affected by the magnitude of the marginal external effect. For individuals who only impose externalities, behavior is consistent with a disutility from imposing harm (but not a sensitivity to the magnitude of the external effect). For those who only receive externalities, individuals increase (decrease) their risky allocation when they are in a decision environment where they receive external benefits (costs). Additional treatments suggest that results are consistent with decreasing relative risk aversion plus an additional disutility from either imposing or receiving harmful externalities.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

Notes

  1. Of course, individuals may also deviate from this standard of ‘rationality’ by, for example, having time-inconsistent preferences (e.g., Gruber & Köszegi, 2001) or by any number of naturally occurring decision errors (e.g., Dörner & Schaub, 1994). My design abstracts away from these important, but separate, issues. This framework does not include delayed payoffs, asymmetric information, or a complex decision environment in order to clearly identify the social component.

  2. For example, in linear public good environments, individuals tend to invest less in whichever account is risky: decreasing cooperating if the public account is risky and increasing cooperation if the private account is risky (see e.g., Artinger et al., 2012; Cherry et al., 2015; Levati & Morone, 2013; Gangadharan & Nemes, 2009), though not always (Stoddard, 2014). Wengström and Vesely (2017) find that if both accounts are risky it is easier to sustain cooperation. In threshold public goods, uncertainty regarding the return from the public good does not affect cooperation unless there is a possibility of loss (e.g., Kidwai & de Oliveira, 2017; McCarter et al., 2010; van Dijk et al., 1999).

  3. I use the term ‘preference’ loosely here, referring to their revealed preference for a particular level of risk taking and not a parameter of an assumed utility function.

  4. The multipliers include: ± 0.1, ± 0.25, ± 0.4, ± 0.5, ± 0.6, ± 0.75, ± 0.9, ± 1.0, 1.2, 1.5, 2.0, 3.0. The largest negative externality (100 E$) was set such that the subject could lose their entire show-up fee but not lose money out of their pocket.

  5. While this may create a wealth or portfolio effect, these are common to all subjects and should not affect the differences across treatments.

  6. Tested by including a ‘Negative 1st’ variable in Table 2 or Table 3, all p > 0.35.

  7. In ARwE-I, 9 subjects always allocate the same amount. There are 8 subjects in ARwE-R and 4 in the NI-R treatment who do the same.

References

  • Acs, Z. J., Braunerhjelm, P., Audretsch, D. B., & Carlsson, B. (2009). The knowledge spillover theory of entrepreneurship. Small Business Economics, 32, 15–30.

    Article  Google Scholar 

  • Aflaki, S. (2013). The effect of environmental uncertainty on the tragedy of the commons. Games and Economic Behavior, 82, 240–253.

    Article  Google Scholar 

  • Andersson, O., Holm, H. J., Tyran, J. R., & Wengstrom, E. (2016). Deciding for others reduces loss aversion. Management Science, 62(1), 29–36.

    Article  Google Scholar 

  • Andreoni, J. (1990). Impure altruism and donations to public goods: A theory of warm glow giving. The Economic Journal, 100, 464–477.

    Article  Google Scholar 

  • Artinger, F., Fleischhut, N., Levati, M. V., & Stevens, J. R. (2012). Cooperation in risky environments: Decisions from experience in a stochastic social dilemma. Jena Economic Research Papers, 2012, 047.

    Google Scholar 

  • Avery, C., Heymann, J., & Zeckhauser, R. (1995). Risks to selves, risks to others. American Economic Review, Papers and Proceedings, 61–66.

  • Balsa, A. I., Gandelman, N., & González, N. (2015). Peer effects in risk aversion. Risk Analysis, 35(1), 27–43.

    Article  Google Scholar 

  • Bartling, B., & von Siemens, F. A. (2010). The intensity of incentives in firms and markets: Moral hazard with envious agents. Labour Economics, 17(3), 598–607.

    Article  Google Scholar 

  • Becker, G. S., & Murphy, K. M. (1988). A theory of rational addiction. Journal of Political Economy, 96(4), 675–700.

    Article  Google Scholar 

  • Bolton, G. E., & Ockenfels, A. (2010). Betrayal aversion: Evidence from Brazil, China, Oman, Switzerland, Turkey, and the United States: Comment. American Economic Review, 100(1), 628–633.

    Article  Google Scholar 

  • Bolton, G. E., Ockenfels, A., & Stauf, J. (2015). Social responsibility promotes conservative risk behavior. European Economic Review, 74, 109–127.

    Article  Google Scholar 

  • Botelho, A., Dinar, A., Costa Pinto, L. M., & Rapoport, A. (2014). Time and uncertainty in resource dilemmas: Equilibrium solutions and experimental results. Experimental Economics, 17, 649–672.

    Article  Google Scholar 

  • Brennan, G., González, L. G., Werner Güth, W., & Levati, M. V. (2008). Attitudes toward private and collective risk in individual and strategic choice situations. Journal of Economic Behavior and Organization, 67(1), 253–262.

    Article  Google Scholar 

  • Brock, J. M., Lange, A., & Ozbay, E. Y. (2013). Dictating the risk: Experimental evidence on giving in risky environments. American Economic Review, 103(1), 415–437.

    Article  Google Scholar 

  • Cettolin, E., & Tausch, F. (2015). Risk taking and risk sharing: Does responsibility matter? Journal of Risk and Uncertainty, 50(3), 229–248.

    Article  Google Scholar 

  • Cettolin, E., Riedl, A., & Tran, G. (2017). Giving in the face of risk. Journal of Risk and Uncertainty, 55(2–3), 95–118.

    Article  Google Scholar 

  • Chakravarty, S., Harrison, G. W., Haruvy, E. E., & Ruström, E. E. (2011). Are you risk averse over other people’s money? Southern Economic Journal, 77(4), 901–913.

    Article  Google Scholar 

  • Charness, G. B., & Gneezy, U. (2012). Strong evidence for gender differences in risk taking. Journal of Economic Behavior and Organization, 83(1), 50–58.

    Article  Google Scholar 

  • Charness, G. B., Gneezy, U., & Imas, A. (2013). Experimental methods: Eliciting risk preferences. Journal of Economic Behavior and Organization, 87, 43–51.

    Article  Google Scholar 

  • Charness, G. B., & Jackson, M. O. (2009). The role of responsibility in strategic risk-taking. Journal of Economic Behavior and Organization, 69(3), 241–247.

    Article  Google Scholar 

  • Charness, G. B., & Rabin, M. (2002). Understanding social preferences with simple tests. Quarterly Journal of Economics, 117(3), 817–869.

    Article  Google Scholar 

  • Cherry, T., Howe, E. L., & Murphy, J. J. (2015). Sharing as risk pooling in a social dilemma experiment. Ecology and Society, 20(1), 68.

    Article  Google Scholar 

  • de Oliveira, A. C. M., Smith, A., & Spraggon, J. (2017). Reward the lucky? An experimental investigation of the impact of agency and luck on bonuses. Journal of Economic Psychology, 62, 87–97.

    Article  Google Scholar 

  • Dörner, D., & Schaub, H. (1994). Errors in planning and decision-making and the nature of human information processing. Applied Psychology, 43(4), 433–453.

    Article  Google Scholar 

  • Eckel, C., de Oliveira, A. C. M., & Grossman, P. J. (2008). Gender and negotiation in the small: Are women (perceived to be) more cooperative than men? The Negotiation Journal, 24(4), 429–445.

    Article  Google Scholar 

  • Eckel, C. C., & Grossman, P. J. (2008). Forecasting risk attitudes: An experimental study using actual and forecast gamble choices. Journal of Economic Behavior an Organization, 68(1), 1–17.

    Article  Google Scholar 

  • Eckel, C. C., & Grossman, P. J. (2002). Sex differences and statistical stereotyping in attitudes toward financial risk. Evolution and Human Behavior, 23(4), 281–295.

    Article  Google Scholar 

  • Engelmann, D., & Strobel, M. (2004). Inequality aversion, efficiency, and maximin preferences in simple distribution experiments. American Economic Review, 94(4), 857–869.

    Article  Google Scholar 

  • Eriksen, K., Kvaløy, O., & Luzuriaga, M. (2014). Risk-taking with other people’s money. Working Paper.

  • Exley, C. (2015). Excusing selfishness in charitable giving: The role of risk. Review of Economic Studies, 83(2), 587–628.

    Article  Google Scholar 

  • Fischbacher, U. (2007). z-Tree: Zurich toolbox for ready-made economic experiments. Experimental Economics, 10, 171–178.

    Article  Google Scholar 

  • Füllbrunn, S., & Luhan, W. J. (2015). Am I my peer’s keeper? Social responsibility in financial decision making. NiCE Working Paper 15–03.

  • Gangadharan, L., & Nemes, V. (2009). Experimental analysis of risk and uncertainty in provisioning private and public goods. Economic Inquiry, 47(1), 146–164.

    Article  Google Scholar 

  • Gneezy, U., & Potters, J. (1997). An experiment on risk taking and evaluation periods. Quarterly Journal of Economics, 111(2), 631–645.

    Article  Google Scholar 

  • Greiner, B. (2004). An online recruitment system for economic experiments. In Forschung und Wissenschaftliches Rechnen. Gesellschaft für wissenschaftliche Datenverarbeitung Bericht, Vol. 63, ed. Kurt Kremer and Volker Macho, 79–93. Göttingen, Germany: Gesellschaft für wissenschaftli¬ che Datenverarbeitung.

  • Gruber, J., & Köszegi, B. (2001). Is addiction ‘rational’? Theory and evidence. Quarterly Journal of Economics, 116(4), 1261–1303.

    Article  Google Scholar 

  • Güth, W., Levati, M. V., & Ploner, M. (2008). On the social dimension of time and risk preferences: An experimental study. Economic Inquiry, 46(2), 261–272.

    Article  Google Scholar 

  • Harrison, G. W., Lau, M. I., Rutström, E. E., & Tarazona-Gómez, M. (2013). Preferences over Social Risk. Oxford Economic Papers, 65(1), 25–46.

    Article  Google Scholar 

  • Humphrey, S. J., & Renner, E. (2011). The social costs of responsibility. CEDEX Discussion Paper No. 2011–02.

  • Kidwai, A. H., & de Oliveira, A. C. M. (2017). Uncertainty and intent in threshold public goods: An experimental investigation. Working paper.

  • Knaup, A. E. (2005). Survival and longevity in the business employment dynamics data. Monthly Labor Review, May. Bureau of Labor Statistics. http://www.bls.gov/opub/mlr/2005/05/ressum.pdf. Accessed 20 Jun 2012.

  • Lahno, A. M., & Serra-Garcia, M. (2015). Peer effects in risk taking: Envy or conformity? Journal of Risk and Uncertainty, 50(1), 73–95.

    Article  Google Scholar 

  • Levati, M. V., & Morone, A. (2013). Voluntary contributions with risky and uncertain marginal returns: The importance of parameter values. Journal of Public Economic Theory, 15(5), 736–744.

    Article  Google Scholar 

  • Li, Z., Rohde, K. I. M., & Wakker, P. P. (2017). Improving one’s choices by putting oneself in others’ shoes – An experimental analysis. Journal of Risk and Uncertainty, 54(1), 1–13.

    Article  Google Scholar 

  • Linde, J., & Sonnemans, J. (2012). Social comparison and risky choices. Journal of Risk and Uncertainty, 44(1), 45–72.

    Article  Google Scholar 

  • Max, W. (2001). The financial impact of smoking on health-related costs: A review of the literature. American Journal of Health Promotion, 15(5), 321–331.

    Article  Google Scholar 

  • McCarter, M. W., Rockmann, K. W., & Northcraft, G. B. (2010). Is it even worth it? The effect of loss prospects in the outcome distribution of a public goods dilemma. Organizational Behavior and Human Decision Processes, 111(1), 1–12.

    Article  Google Scholar 

  • Minniti, M. (2005). Entrepreneurship and network externalities. Journal of Economic Behavior and Organization, 57(1), 1–27.

    Article  Google Scholar 

  • Montinari, N., & Rancan, M. (2018). Risk taking on behalf of others: The role of social distance. Journal of Risk and Uncertainty, 57(1), 81–109.

    Article  Google Scholar 

  • Pahlke, J., Strasser, S., & Vieider, F. M. (2015). Responsibility effects in decision making under risk. Journal of Risk and Uncertainty, 51(2), 125–146.

    Article  Google Scholar 

  • Rohde, I. M. T., & Rohde., K. I. M. (2011). Risk attitudes in a social context. Journal of Risk and Uncertainty, 43(3), 205–225.

    Article  Google Scholar 

  • Rovira, J., Viscusi, W. K., Antoňanzas, F., Costa, J., Hart, W., & Carvalho, I. (2000). Smoking risks in Spain: Part II-perceptions of environmental tobacco smoke externalities. Journal of Risk and Uncertainty, 21(2–3), 187–212.

    Article  Google Scholar 

  • Schildberg-Hörisch, H. (2010). Is the veil of ignorance only a concept about risk? An experiment. Journal of Public Economics, 94(11–12), 1062–1066.

    Article  Google Scholar 

  • Smith, V. L., & Wilson, B. J. (2017). Sentiments, conduct, and trust in the laboratory. Social Philosophy and Policy, 34(1), 25–55.

    Article  Google Scholar 

  • Stoddard, B. V. (2014). Probabilistic production of a public good. Economics Bulletin, 34(4), 2427–2442.

    Google Scholar 

  • Sutter, M. (2009). Individual behavior and group membership: Comment. American Economic Review, 99(5), 2247–2257.

    Article  Google Scholar 

  • Trautmann, S. T., & Vieider, F. M. (2012). Social influences on risk attitudes: Applications in economics. In: Handbook of risk theory. Springer Publishing, 575–600.

  • Uccello, C. E. (2006). Costs associated with secondhand smoke. American Academy of Actuaries. http://www.actuary.org/pdf/health/smoking_oct06.pdf. Accessed 20 Jun 2012.

  • van Dijk, E., Wilke, H., Wilke, M., & Metman, L. (1999). What information do we use in social dilemmas? Environmental uncertainty and the employment of coordination rules. Journal of Experimental Social Psychology, 35(2), 109–135.

  • Viscusi, W. K., Phillips, O. R., & Kroll, S. (2011). Risky investment decisions: How are individuals influences by their Groups? Journal of Risk and Uncertainty, 43(2), 81–106.

    Article  Google Scholar 

  • Wengström, E., & Vesely, S. (2017). Risk and cooperation: Experimental evidence from stochastic public good games. Lund University Department of Economics Working Paper Vol 2017 No. 3.

  • Zhang, H. (2019). Common fate vs. independent fate: The influence of risks on contribution to public goods. Journal of Economic Psychology, 70, 12–21.

    Article  Google Scholar 

Download references

Acknowledgements

Thanks to Abdul Kidwai, Irene Mussio, Rodolfo Mango, Matthew Denny, Lawrence DeGeest, Anthony Lorencette-Desouza, and Jose Garces Ceballos for assistance with running sessions. Helpful comments from editors and anonymous referees, my CeMENT team and mentors, Cary Deck, Sarah Jacobson, John Spraggon and participants at the Economic Science Association North American Regional Meetings, Southern Economic Association annual meetings, and the Biennial Conference on Social Dilemmas greatly contributed to the quality of the research. Funding was provided by a Faculty Research Grant/Healey Endowment Grant and an Interdisciplinary Scholars Institute ‘Value’ Fellowship at the University of Massachusetts Amherst. All work was approved by the UMass Amherst IRB # 2012-1400.

Author information

Authors and Affiliations

  1. Department of Resource Economics, University of Massachusetts Amherst, 203 Stockbridge Hall, 80 Campus Center Way, Amherst, MA, 01003, USA

    Angela C. M. de Oliveira

Authors
  1. Angela C. M. de Oliveira
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Angela C. M. de Oliveira.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Supplementary Information

Below is the link to the electronic supplementary material.

Supplementary file1 (PDF 234 KB)

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

de Oliveira, A.C.M. When risky decisions generate externalities. J Risk Uncertain 63, 59–79 (2021). https://doi.org/10.1007/s11166-021-09357-6

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11166-021-09357-6

Keywords

JEL Classification

Search

Navigation